Benchmarks stop us thinking: AXA IMBY BEN COLLINS | TUESDAY, 31 JUL 2012 11:45AMThe shock of the GFC, the impacts of the Euro crisis and moribund world capital markets ever since are forcing institutional investors to confront the reality that their traditional investments models aren't working, said AXA Investment Managers. |
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Brian Redican
CHIEF ECONOMIST
NEW SOUTH WALES TREASURY CORPORATION
NEW SOUTH WALES TREASURY CORPORATION
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Often one of the products of smart-beta portfolios is the creation of blended benchmarks. There are some pretty substantial operational costs and risks associated with this new approach to benchmarking using blends and customised hedges. The choice of benchmark architecture should definitely not be an afterthought. Picture an example combining FSTE ASEAN EX-Singapore Hedged into SGD 50% blended with FSTE Singapore in SGD 50% assuming daily modelling? The issues dictated by who designs the rules of the blend, the calculation methodology, whether the creation of the new benchmark levels are calculated in-house or by a specialist provider, the availability of a license to calculate blended outcomes and general governance of business justification can all drive complexity, inefficiency and leave a difficult to foresee "event" risk. Now imagine scaling implementation and opps up to cope with systemic blending of benchmarks for trade management, compliance, risk and performance attribution in-house - one of the popular choices. However you measure the likelihood of an unfavourable event occurring regarding the blending, the impact of errors in a calculation may include paying out multi-year penalty fees and substantial reputational damage. RIMES recommends spending some time considering risk management and a review of externally available solutions to support blends and benchmark customisations.